Dear ZKX members,
Thank you to everyone who joined our first Community Call on Saturday, 25th June. The attendance peaked at 579 members on Discord (!), and we can't thank you all enough for sparing time to join us on a weekend. We are overwhelmed by the support and draw immense confidence from the fact that so many people are excited about the launch of ZKX. We will push even harder to deliver beyond your expectations!
We would also like to take this opportunity to thank all our contributors who are working hard to make our mission a reality.
In case you didn't know, ZKX is the first permissionless protocol for derivatives built on StarkNet, with a decentralized order book and a unique way to offer complex financial instruments as swaps.
The Problem with the current state of the market
Eduard: There is a lack of permissionless listing for upcoming projects within web3. Currently, protocols depend heavily on oracles, market makers and centralized listing mechanisms.
Centralized exchanges easily outpace decentralized exchanges in listing new assets as perpetual swaps. This makes it difficult for new assets that want to be listed as derivatives to bootstrap liquidity and depth of market. There are also no native liquidity incentives for derivatives protocols, traders or market makers on decentralized exchanges.
Finally, although perpetual swaps are popular, retail and institutional traders need other sophisticated investment tools to trade under varying market conditions.
And the Solution!
We present to you ZKX — an upcoming permissionless protocol that enables trading derivatives on StarkNet with built-in rewards mechanisms, liquidity provisioning and complex trading strategies as swaps. The protocol design is optimized to allow for the creation of new trading instruments based on perpetual swaps, which are inspired by traditional options strategies.
The platform has a dynamic UX geared towards both retail and institutional traders, with API/SDK integrations and features tailored to meet the needs of different types of traders. But, most importantly, the DAO sits atop the protocol!
The Birth of L3
Eduard: While building the ZKX protocol, we were faced with two options. We could either use the virtual AMM model or the centralized order book. Virtual AMMs have weaknesses, such as slippage issues and not being suitable for high-volume trading. On the other hand, the centralized order book is dependent on centralized actors and therefore isn't decentralized or trustless. Another problem was that on current oracle solutions, it is costly to create new secure price feeds. This constrains the growth of a decentralized exchange.
At ZKX, we created a solution that combines the best features of both. It is called the Node Network, and it will work as an internal oracle provider in case DAO members want to register new assets not listed on any oracle.
BitPactum: The Node Network will work as the internal oracle provider for us. We at ZKX truly believe in creating a system where the community decides what assets they would like to bring into existence and what rewards they should offer.
BitPactum: Why StarkNet? We want to build a protocol that is very affordable for traders and where high-frequency trading is a possibility. We also want to move our internal logic — the algorithms and mathematical functions, on-chain. For that, Cairo, the programming language for StarkNet, was the perfect match in terms of technology. Everything on our protocol sits within L2, and users have complete control over their accounts and their funds.
There are two fundamental parts located within the Node Network — the Decentralized Limit Order Book (DLOB) and the DPS (Data Provider Service). The DPS gives us flexibility regarding the data we can bring, the type of assets we can procure, and the prices we can have. This also adds scalability to the system because all matches within the order book happen much faster than possible on-chain. However, this system excludes everything related to funds, contracts, or mining. The last part of the check, and the single source of truth, is on-chain.
We use the node network as an extension to our protocol, which increases flexibility, scalability and execution speeds. But all fundamental checks are still within the L2 of StarkNet. This means that you can benefit from fast execution or flexibility in whatever type of transactions you make while enjoying the known security and privacy of the transaction happening on-chain. There are three fundamental things here: the ability to bring data, the ability to make it fast, and the ability to make it secure in a way that you control your funds on-chain. That's why we plan to open up the node network in the future.
All of you can participate in running the order book. The order book will always be validated within the framework of ZK-rollups and ZK-proofs. By following the principles of being trustless and permissionless, we've built a system that is decentralized.
Swap Liquidity Mining
Eduard: This will give you a better understanding of the differences between ZKX and other protocols. If you were there in the initial phases of the DeFi, you would have seen that Uniswap and SushiSwap were offering native rewards and liquidity mining rewards. Every new project that launched a liquidity pool could offer some incentives on top of their pool to ensure that there was depth of market and enough liquidity for everyone to trade that token in and out.
We realized that there was no such mechanism for perpetual swaps. We wanted to create a similar mechanism, but with a twist to it. We didn't want to give the ability to any participant to pump and dump, or to take advantage of short-term incentives and create distortions in the protocol. Instead, we wanted to ensure that all the traders have an equal playing ground versus the market makers and the professional firms. It doesn't matter if you're making money or not; just by participating and being part of the protocol, you are also rewarded.
To ensure that the users receive rewards based on their trading behavior, we developed the High Tide algorithm. The algorithm analyzes your trading behavior during each season, and according to the consistency of your trading, the duration of your trades, volume, and overall participation, it will give you a score. Based on that score, you will receive the rewards that are set for that particular swap at the end of the season.
Any DAO, protocol or an investor from the community that wants to list an asset, can provide any ERC-20 reward of their choice to incentivize liquidity to flow in for that particular perpetual swap. So it's an open system where through DAO governance, anyone can release a swap and offer rewards to trade that swap.
It provides a transparent and effective mechanism to reward consistent activity within the swaps. It also enables a bit of competition amongst the swaps because the more traders there are and the higher the volume on your swap, the more rewards you will be able to capture versus the other.
Eduard: We talked about perpetual swaps being an instrument that is very commonly used in the industry today. Everyone likes them, and all the other exchanges provide these kinds of perpetual futures. But at ZKX, we want to offer something fundamentally innovative that will provide new instruments and new options for traders in the long term—presenting T-Swaps!
T-Swaps are mostly options strategies that are transformed into perpetual swaps. They give you a way to monetize your position even when the market is going sideways or down, or when there's high volatility.
Here's a bit of alpha — Throughout the summer, we're going to release technical papers. They will detail the implementation as well as the mathematical formulas that are behind ZKX's product.
Next, we have the Adaptive Balancing Rate. The funding rate is a common feature of perpetual swaps and derivatives exchanges. So if we have the ability to lease new assets faster, and we have the ability to list any asset that the community wants, then we might need a balancing rate or a funding rate that can adapt faster and better to highly volatile assets.
That is why we created the adaptive balancing rate. The ABR utilizes Bollinger Bands and a price-jump analysis. Whenever the asset has a sudden jump in volatility, the ABR provides a premium to the funding rate. This provides an additional incentive for everyone to balance the order book. More details on this one will go out in an upcoming technical paper.
The growth opportunity for decentralized perpetual swaps is massive. So for us, it's about creating the right user experience that will be as comfortable for a DeFi user as it is for a centralized exchange user. And that's why it was essential for us to use StarkNet and build upon the account abstraction model and the economic rewards structure.
Eduard: Liquid governance is a set of smart contracts that will track your behavior within the protocol. Every time you trade, participate in voting, run a node or contribute, you will receive shares of ZKX called virtual governance shares. These virtual governance shares will have a natural decay, meaning that if you stop participating, your overall share will disappear naturally after some time. So as long as you're participating in the protocol, you will always have your voice heard.
This is going to change how DAO Governance works!
What is the incentive as a token holder or trader to accumulate these Virtual Governance Shares?
Discounted trading fees and access to protocol revenue sharing. The revenue coming in from the liquidations and the trading fees in USDC will be distributed amongst the holders of the virtual governance shares. They will also have access to premium features, like higher leverage.
What about the Governance Token?
The governance token is going to be locked and staked in the pool. Everyone that stakes the token in the staking pool will receive virtual governance shares and accumulate rewards.
Eduard: We started last year, and the journey so far has been phenomenal! The fundraising announcement will come out very soon, and we have some exciting investors and partners on board. Then, we're going to have our smart contracts audited by Nethermind. We'll also be releasing the technical papers and gearing up for Testnet by Q3.
The full decentralization of the node network is going to happen next year. There's still a bit more development to do around the node client and the consensus algorithm, but we're on the right path.
BitPactum: We're very close to the audit. One of the goals of the engineering team is to have a comprehensive end-to-end preparation of smart contracts for the auditors. The audit is performed as a complete review of all smart contracts developed.
At the same time, one of the most important goals for the team is to continue the development of the decentralized limit order book and the decentralized ZXX node application. I believe we have brilliant, significant progress on both fronts. It's super exciting, with many impressive innovations in the network layer and the consensus algorithm. So I'm proud of everything the engineering team is delivering right now.
NS: Currently, we are getting ready to release our Partners Program. The idea for the Partners Program is to create a funnel where ZKX and potential partners can engage and filter through a step-by-step process, eventually adding more backers to the Partners tab.
Who are we looking to partner with?
To start with, we're seeking to partner with centralized and decentralized exchanges, market makers, prop traders and crypto hedge funds. We're also looking at node runners and liquidity providers.
We also wish to tap into projects that are creating spot markets and the exchanges that support them, helping them understand the value of having a derivatives market for their token.
The other focus is on payment providers that provide on-ramp and off-ramp solutions. This is more about solving a problem for the future. We feel that the initial traction in ZKX will come from power users such as yourself, but down the line, retail users will also form a large part of the checks. We want to make the trading experience cohesive and more inclusive by bringing in people who have never really dipped their toes into DeFi before.
You will see us in almost every major event coming within the ecosystem. Please reach out to us if you know someone out there whom we should work with!
JP: From setting up the brand, to our socials, and to speaking at public events, we have received a phenomenal response! We've already got over 170k users on our waitlist and over 30k followers across our social media handles. All of this in just 120 days!
Next up, we have a series of major announcements, followed by our contributors program. We're also powering StarkCon, the leading community-driven conference for StarkNet.
Stay tuned to all our handles, and especially our Discord. We require all your support to make this vision bigger!
Most investors are only interested in short-term benefits instead of the real long-term value of the project. So how can you convince them to invest in your platform long-term in the future? And do you have enough courage and capital to survive the cold bear market?
NS: Great question! The important word here is 'skin in the game'. Like any other industry, web3 has all kinds of investors. We align with investors who look at the fact that at ZKX, we are building a solution today for the future. For the second part of the question, the answer is that ZKX as a platform is market-movement independent, so yes, we are confident of our chances.
Why did you choose ZK-Rollups over Optimistic Rollups? What are its advantages and disadvantages?
BitPactum: ZK Rollups are simply faster, more scalable and more secure than Optimistic Rollups. In general, optimistic rollups are great, but ZK rollups give more power and more functionality to a product with a reduced risk of fraud. Also, the ZK rollup tech stack is maturing very quickly!
Wen token? And can you give us more information about tokenomics?
Eduard: It's highly classified information (lol). We're very conscious of the fact that to drive this project forward; we need to have the community involved from the beginning. The keywords here are liquid governance and the airdrop. Dates and details will be kept secret for the time being. More information will be released in due course of time.
In addition to Perpetuals, what other instruments will you provide?
Regarding incentives for traders and rewards — can wash trading happen, to reap the incentives?
Eduard: Theoretically, they could try. But thanks to the High Tide algorithm and Swap Liquidity Mining, it will be hard to game the system, thanks to their unique payoff structures.
Thank you again for joining us, and for posting your questions! We'll see you at the ZKX Community Call #2 🤝
ZKX is a permissionless protocol for derivatives built on StarkNet, with a decentralized order book and a unique way to offer complex financial instruments as swaps. The protocol is powered by a DAO and will provide an elevated trading experience with gamified leaderboards and unique liquid governance. ZKX's mission is to democratize access to global yields through its offerings to anyone, anywhere.